Returns On Capital At Freewon ChinaLtd (SHSE:688678) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Freewon ChinaLtd (SHSE:688678), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Freewon ChinaLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.045 = CN¥116m ÷ (CN¥3.5b - CN¥909m) (Based on the trailing twelve months to March 2024).

Therefore, Freewon ChinaLtd has an ROCE of 4.5%. On its own, that's a low figure but it's around the 5.6% average generated by the Machinery industry.

View our latest analysis for Freewon ChinaLtd

Above you can see how the current ROCE for Freewon ChinaLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Freewon ChinaLtd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Freewon ChinaLtd doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 4.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Freewon ChinaLtd's ROCE

While returns have fallen for Freewon ChinaLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Freewon ChinaLtd, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Freewon ChinaLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.